McCain's Health Proposal: Will it Save Money?

There has been recent attention to John McCain’s health care plan – which is really quite radical. There are two key elements to his plan. (1) McCain would eliminate the tax deduction for employer-sponsored health insurance, and replace this with a much smaller tax credit.  (2) McCain would allow insurers to sell their health plans across state lines – essentially letting them choose in which state to be regulated.

Many others have pointed out the advantages of these two approaches, including exposing patients to the real cost of their health care, making insurance more “portable,” and allowing people to avoid costly state mandates.    Others have pointed out some substantial concerns ; these include “cherry picking” that would make insurance difficult to obtain for those with illness, decreased ability for the healthy to subsidize the care of those with illness, and loss of important consumer protections enforced variably by states.

I’d like to address the question of whether McCain’s proposals would actually save money.

There are a few mechanisms by which this type of reform could save real dollars in the health care system.

(1) Elimination of mandates -- states with high levels of mandates do have higher costs. For example, Charlie Baker in a recent post said that mandates cost a total of 12% of the insurance premium in Massachusetts.  Here is a link to the  report.

Elimination of state regulations could also allow for substantial innovation in health care finance and delivery.  See a great article by James Robinson on this in the current Health Affairs

 (2) Exposure of patients to actual health care costs could create pressure to lower fees.   However, this pressure would generally have to be exerted through lower volumes.  In general, Massachusetts is below national averages for most type of utilization - so the question is "would this exposure to real costs reduce unnecessary care, or necessary care?"  The most recent article from Newhouse, et al from the RAND Health Insurance Experiment suggests that increased exposure to costs will reduce both appropriate and unnecessary care.  

However, the  McCain proposal is also likely to raise costs in other ways.

(1) It costs far more to administer a health plan which is sold retail, to individuals, rather than wholesale, to employers.   Therefore, the "medical loss ratio" of these new plans would be far lower than the 85% we often see now.  It might be worth paying more on the administrative side if it would help us deliver better care - but that's not clear. 

(2) Although there are many reasons why we should not tie health insurance to employment, it's most important to have a group to share risk.    Employers are a natural group - and unless we want government-sponsored health insurance based on home address, it's not clear what other grouping would work well.  With individuals purchasing insurance on their own, it's likely that we will see far more insurer competition on recruiting the healthiest patients.  That means that the insurers will have higher profits, but fewer of the dollars spent on health care premium will actually go to health care. 

(3) If this reform does swell the ranks of the uninsured, it could encourage price increases to compensate for this lost revenue.   There is some evidence that when Medicare underpays hospitals, they turn around and increase prices to private payers.  (Go to chart 4.7)  

My conclusion - it is likely that this reform, if passed, would lower costs somewhat - but the social cost in terms of valuable care foregone would be too high.  I believe that this approach would likely swell the ranks of the uninsured enough that it would lead to compensatory increases in costs for those with insurance.  If we are willing to allow patients to go without care, then this could lower costs substantially.   I suspect we are not willing.